Isn Indias cash market much too inefficient to support concepts like derivatives?
There is no evidence to suggest that market inefficiencies on the cash market make it difficult to sustain derivatives markets. Many emerging markets that have derivatives markets are more primitive than India on the key determinants of market efficiency, i.e. (a) high information availability, (b) high skills in keeping accounts and reading accounting reports, (c) high population of speculative traders and (d) low transactions costs. Derivatives markets are successful if people face risks that they wish to hedge themselves against; market inefficiency on the underlying market probably serves to increase the demand for these hedging services. ? is a Ph.D. thesis which is devoted to an examination of BSE returns data from 1990 to 1995. This evidence supports the notion that the markets are quite informationally efficient, given the (high) level of transactions costs that has prevailed in the past. One widely prevalant practise that serves to interlink market prices and corporate news is
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